Business Ethics and Corporate Governance-Definitions, Principles and Issues

8/12/2019 Business Ethics and Corporate Governance-Definitions, Principles and Issues

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2.1.2010 A Search Right & Three CheersPresentation

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BUSINESS ETHICS AND CORPORATE GOVERNANCE

DEFINING ETHICS IN BUSINESS

Ethics is the field of philosophy that studies systems, norms, or

values that distinguish between what is good and bad or right and

wrong. The field of business ethics focuses on examining conduct

and policies and promoting appropriate conduct and policies within

the context of commercial enterprise, both at the individual and the

organizational level.

Business ethics is a form of applied ethics where researchers and

professionals use theories and principles to solve ethical problems

related to business. Consequently, a central question of business

ethics is "How do businesses determine what is appropriate or

ethical conduct for any given commercial task?" Business ethicscovers all levels of business activity, including the obligations and

responsibilities of businesses to customers, employees, other

businesses, national and multinational governments, and the

environment.


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EVOLUTION OF ETHICS IN BUSINESS

Derived from the views of Protestants John Calvin (1509-1564) and

Martin Luther (1483-1546), the Protestant work ethic that was

imported from Europe to North America during the 17th, 18th, and

early 19th centuries was a set of beliefs that encompassed secular

asceticismthe disciplined suppression of gratification in favour of

ceaseless work in a worldly calling according to God's will.

This work ethic emphasized hard work, self-reliance, frugality,

rational planning, and delayed gratification that formed the

foundation of modern capitalism and allowed American and

European societies to accumulate economic capital. The Protestant

work ethic dominated white American society through the 1800s.


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This ethic aided in the emergence of an upwardly mobile

bourgeois classcomprised of successful farmers,

industrialists, and craftsmenthat was preoccupied with

social conformity and materialism.

At the same time, a much clearer definition of success and

failure developed that was wrapped up in material terms; this

definition would play a major role in the societal evolution of

the Asian world inclding India somewhere in 1960s.


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This ethic aided in the emergence of an upwardly mobile

bourgeois classcomprised of successful farmers,

industrialists, and craftsmenthat was preoccupied with

social conformity and materialism.

At the same time, a much clearer definition of success and

failure developed that was wrapped up in material terms; this

definition would play a major role in the societal evolution of

the Western world.


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DEFINING CORPORATE GOVERNANCE

Corporate governance is the set of processes, customs,

policies, laws, and institutions affecting the way a corporation

(or company) is directed, administered or controlled.

Corporate Governance also includes the relationships among

the many stakeholders involved and the goals for which the

corporation is governed. The principal stakeholders are the

shareholders, management, and the board of directors. Other

stakeholders include employees, customers, creditors,suppliers, regulators, and the community at large.


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Corporate governance is a multi-faceted subject.

An important theme of corporate governance is to

ensure the accountability of certain individuals in

an organization through mechanisms that try toreduce or eliminate the principal-agent problem.. A

related but separate thread of discussions focuses

on the impact of a corporate governance system in

economic efficiency, with a strong emphasis on

shareholders' welfare


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Corporate governance is a multi-faceted subject.

An important theme of corporate governance is to

ensure the accountability of certain individuals in

an organization through mechanisms that try toreduce or eliminate the principal-agent problem.. A

related but separate thread of discussions focuses

on the impact of a corporate governance system in

economic efficiency, with a strong emphasis on

shareholders' welfare


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In A Board Culture of Corporate Governance, business author

Gabrielle O'Donovan defines corporate governance as 'an

internal system encompassing policies, processes and

people, which serves the needs of shareholders and other

stakeholders, by directing and controlling managementactivities with good business savvy, objectivity, accountability

and integrity.

Sound corporate governance is reliant on external

marketplace commitment and legislation, plus a healthy board

culture which safeguards policies and processes'.


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O'Donovan goes on to say that 'the perceived quality of a company's

corporate governance can influence its share price as well as the

cost of raising capital.

Quality is determined by the financial markets, legislation and other

external market forces plus how policies and processes areimplemented and how people are led.

External forces are, to a large extent, outside the circle of control of

any board. The internal environment is quite a different matter, and

offers companies the opportunity to differentiate from competitors

through their board culture.

To date, too much of corporate governance debate has centred on

legislative policy, to deter fraudulent activities and transparency

policy which misleads executives to treat the symptoms and not the

cause.


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It is a system of structuring, operating and

controlling a company with a view to achieve long

term strategic goals to satisfy shareholders,

creditors, employees, customers and suppliers, andcomplying with the legal and regulatory

requirements, apart from meeting environmental

and local community needs.


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Report of SEBI committee (India)on Corporate Governance

defines corporate governance as the acceptance by

management of the inalienable rights of shareholders as the

true owners of the corporation and of their own role as

trustees on behalf of the shareholders.It is about commitment to values, about ethical business

conduct and about making a distinction between personal &

corporate funds in the management of a company.

The definition is drawn from the Gandhian principle of

trusteeship and the Directive Principles of the IndianConstitution. Corporate Governance is viewed as ethics and a

moral duty


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PRINCIPLES OF CORPORATE GOVERNANCE

1. Rights and equitable treatment of shareholders:

Organizations should respect the rights of

shareholders and help shareholders to exercisethose rights. They can help shareholders exercise

their rights by effectively communicating

information that is understandable and accessible

and encouraging shareholders to participate in

general meetings.


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2. Interests of other stakeholders:

Organizations should recognize that they have legal and other

obligations to all legitimate stakeholders.

3. Role and responsibilities of the board:

The board needs a range of skills and understanding to be

able to deal with various business issues and have the ability

to review and challenge management performance. It needs tobe of sufficient size and have an appropriate level of

commitment to fulfill its responsibilities and duties. There are

issues about the appropriate mix of executive and non-

executive directors.


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4. Integrity and Ethical Behaviour:

Ethical and responsible decision making is not only important for

public relations, but it is also a necessary element in risk

management and avoiding lawsuits. Organizations should develop acode of conduct for their directors and executives that promotes

ethical and responsible decision making. It is important to

understand, though, that reliance by a company on the integrity and

ethics of individuals is bound to eventual failure. Because of this,

many organizations establish compliance and ethic programmes to

minimize the risk that the firm steps outside of ethical and legalboundaries.


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Disclosure and Transparency:

Organizations should clarify and make publicly known the roles and

responsibilities of board and management to provide shareholders

with a level of accountability. They should also implementprocedures to independently verify and safeguard the integrity of the

company's financial reporting.

Disclosure of material matters concerning the organization should be

timely and balanced to ensure that all investors have access to clear,

factual information.


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Issues involving corporate governance principles include:

1. Internal controls and internal auditors

2. The independence of the entity's external auditors and the quality

of their audits

3. Oversight and management of risk

4. Oversight of the preparation of the entity's financial statements

5. Review of the compensation arrangements for the chief executive

officer and other senior executives

6. The resources made available to directors in carrying out their

duties7. The way in which individuals are nominated for positions on the

board

8. Dividend policy

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Business Ethics and Corporate Governance-Definitions, Principles and Issues